Growth, Trade and Environment

Abstract

In the previous chapter, we have explored different types of empirical studies related to the impact of trade liberalization on the environment. These studies ranged from single-country ones to multi-regional ones (including many countries, sometimes almost all important ones in the present context); they had different types of modelling (such as regular cross-country regression estimation, computable general equilibrium estimation). Some of these studies also incorporated economic development into the analysis; however, we deliberately delayed the role of growth in this literature to this chapter. In this chapter, we will explicitly analyze interactions between growth, trade and environment. In the literature, the standard approach is to model the level of pollution as a function of economic growth and trade liberalization (together with other relavant variables). Here, we will present an alternative approach and analyze the impact of trade and economic growth on the environmental policy performance. We will first start with a general introduction to the so-called environmental Kuznets curve (EKC) hypothesis; then, we will test it in a framework that is more consistent with the economic theory in the background. We will also incorporate the impact of trade liberalization on EKC hypothesis. In the second part of this chapter, we will investigate EKC hypothesis by using a recently developed econometric test known as threshold estimation. As EKC hypothesis is, in essence, about finding and testing the significance of a threshold, this technique is a perfect match for testing it. We start with a general introduction on EKC hypothesis.